Economy Drives Market Rally

A raft of positive economic news drove the Dow Jones Industrial Average above 14000 for the first time in more than five years, with Friday's jobs numbers countering a surprising report earlier in the week that the economy contracted at the end of 2012.

WSJ's Sudeep Reddy and Phil Izzo join the News HUb to discuss the latest jobs report numbers and what they mean for the larger U.S. economy. Photo: AP Images.

The government's main snapshot of the labor market showed employers added 157,000 jobs in January and hired more workers in 2012 than previously estimated.

The labor report reinforced the view that the economy is growing at a steady, but excruciatingly slow, pace. Housing is recovering. The latest reading from purchasing managers suggested manufacturing is perking up after slumbering for a few months. And Congress has averted a debt-ceiling crisis, at least for now, though spending cuts loom.

ENLARGE

Big problems remain, including a stubbornly high jobless rate. Friday's report showed unemployment ticked up to 7.9% in January from 7.8% the month before.

The Standard & Poor's 500-stock index gained 15.06 points, or 1.01%, to 1513.17, and is now 3.3% from its record high. The Nasdaq Composite rose 36.97 points, or 1.18%, to 3179.10. All three major benchmarks have posted gains for five consecutive weeks. Meantime, the Russell 2000 index of small-capitalization stocks, which broke through to all-time highs last month, tacked on another 1% Friday.

The recent move higher has been powered by several trends. Corporate earnings have been stronger than expected, the Federal Reserve shows little sign that it will wind down its stimulus efforts and the domestic economy is showing signs of improving.

At the same time, investors continued to show growing confidence in the stock market, putting $34.2 billion of new money into stock mutual funds and exchange-traded funds over the past four weeks, capped by a $12.7 billion inflow in the week ended Wednesday, according to fund-flow tracker Lipper Inc. That flood of new money is greater than in any four-week span since 1996, and outpaces the net pickup for all of 2012, according to Lipper.

"We've had so many negatives fading away—geopolitical negatives, congressional negatives, they're all fading away," said
Jerry Harris,
chief investment officer of the asset-management arm of Birmingham, Ala.-based Sterne Agee, which manages about $17 billion in assets.

He said the firm began strongly recommending clients move into stocks over the past year, with heavy resistance from clients. But he thinks that may be changing now: "Stocks now are reflecting expectations of stronger growth, and I think we're going to see it."

The Dow industrials are now trading in rarefied air. Friday marked just the 10th day that the blue-chip Dow finished above the 14000 level. The last time the Dow was above 14000, the bulls couldn't hold on for long, and the index slid 54% over the next 17 months.

The recent bullishness has spread overseas. Japan's Nikkei Average has strung together 12 consecutive weeks of gains, and is now at its highest level since April 2010. In China, the Shanghai Composite rose 1.4% to an eight-month high. London's FTSE 100 gained 1.1% to its highest level since May 2008.

A Historical View

Amid the optimism, demand for the perceived safety of U.S. Treasurys fell, sending the yield—which moves inversely to price—up to 2.017%, a level not seen since April 2012. Reflecting the economic confidence, the price of copper, an industrial metal closely tied to global growth prospects, gained 1.4% to a three-month high.

"I've liked what I've been seeing economically," said
John Buckingham,
who manages about $500 million as chief investment officer at Al Frank Asset Management in Aliso Viejo, Calif. "It's not too hot, not too cold, it's just right to keep the Fed from tightening, and yet there is underlying improvement." While acknowledging the recent equity inflows, Mr. Buckingham pointed out that the moves were only beginning to reverse several years of sustained outflows.

"None of my clients are beating a path to tell me to buy equities," Mr. Buckingham said. "More people are still thinking, 'Let's take some of the gains from stocks and put it into something safe, like bonds.'"

Other reports Friday confirmed the view of an economy making slow headway. The Institute for Supply Management said its reading of factory activity rose to 53.1, its best score since April. Any reading above 50 indicates expansion. Construction spending rose in December, aided by the recovering housing sector, while a gauge of consumer confidence from the University of Michigan unexpectedly was revised up for January.

"We're starting to move in the direction of a more broad-based recovery," said Brian Bethune, chief economist of Alpha Economic Foresights LLC.

To be sure, the economy faces a host of challenges that could slow or even halt the recent progress—from tax increases that are cutting into the pay of many Americans to a global slowdown that has sapped demand for U.S. exports. Also looming are big cuts in federal government spending which could jolt the economy. But companies appear to be pushing forward with hiring. Friday's report showed jobs being added in a wide swath of the economy, from construction and retail to health care.

Still, strength is not uniform. The factory sector added only 4,000 jobs in January—and, on net, has changed little since July.

Clairson Plastics, a closely held manufacturer in Ocala, Fla., which makes plastic parts for products such as baby bathtubs, plans to double its workforce this year if it finalizes several pending contracts. After the recession, the company whittled its workforce to 35 people from 75.

"As we add work, we'll be adding people because we've got the thing down to as lean as we can get it now," said Steven Meitzen, Clairson's director of sales and marketing. "Now we're in the growth mode."

Friday's report reinforced many economists' sentiment that key elements of the economy remain firm, even as the government reported this week that gross domestic product—the sum of all goods and services produced in the U.S.—shrank unexpectedly in the fourth quarter. Details from that report suggested that pillars of the private sector—consumer spending, business investment and housing—were solid, but were offset by government cuts and falling exports.

The contrast between the public and private sectors has largely played out in the labor market. Since November, private employers have added 624,000 jobs, while the federal government, along with state and local ones have cut 24,000 jobs.

Economists expect further spending cuts by federal and local governments to continue to weigh on the job market. Economist Stephen Stanley of Pierpont Securities said job creation will be bumpy this year and the unemployment rate is unlikely to fall much. "I think there's going to be continued caution in terms of hiring," Mr. Stanley said, pointing to looming political battles in Washington that will cause some companies to postpone expanding.

"I think there's still a lot of uncertainty about the tax code. I think there's still some residual uncertainty about the possibility of spending cuts and maybe even a debt-ceiling fight," Mr. Stanley said. "I don't think that story is entirely gone."

Friday's report contained annual revisions, based on newly available tax data, showing job growth in 2012 was stronger than initially reported. The economy added an average 181,000 jobs a month in 2012, more than in 2011 but still not the level needed to quickly bring down unemployment. Many economists estimate that the U.S. needs to add about 150,000 each month just to keep up with population growth.

The construction sector, which was decimated by the recession, has seen a fourth-month surge in employment, likely fueled by demand for new homes as the housing market picks up. The sector is also being buoyed by a push to repair damage from October's superstorm Sandy.

Retailers added the most jobs last month, propelled in part by higher auto sales as Americans replace aging cars.

One sign that could bode well for growth is rising incomes for American workers. Average hourly earnings rose four cents to $23.78 and have risen 2.1% over the past year. That is slightly higher than the current rate of inflation, meaning that workers are earning more even when higher prices are taken into account.

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